Two Opportunity Fund industry groups submitted letters to the Department of the Treasury in the past couple weeks. Links to the letters are below. These letters take the same approach – they identify points of friction that each group has come upon in its discussions about the Opportunity Fund legislation, and propose action the Treasury Department can take in its regulations to address those points of friction. If you like this kind of stuff, read both letters all the way through. Doing so will give you a sense of how Opportunity Fund devotees view and prioritize the technical issues that the Opportunity Fund legislation raises.
What do the letters have in common?
a) 90% Rule and Qualified Opportunity Zone Property. Both letters bring focus to the 90% Rule. The 90% Rule says that an Opportunity Fund must have 90% of its assets invested in Qualified Opportunity Zone investments; and if the Fund falls short of the 90% Rule, a penalty must be paid. The questions are rather wide-ranging, and reference should be made to the letters themselves if you are interested. Something needs to be pointed out that has gotten little air time, however: the penalty for falling short of the 90% rule seems to be moderate; the penalty applies to the amount of money by which the Fund falls short of the 90% threshold on a monthly basis, and the penalty rate is the IRS underpayment rate – currently 5% per annum. And so, while clarification is needed about what does and does not qualify for the 90% Rule, at the end of the day it seems that Opportunity Funds will be able to function effectively, and remain attractive investment vehicles, even if they have periods where they fall short of the 90% investment requirement.
b) Partnership Questions. Both letters raise questions about partnerships and how they relate to Opportunity Funds. Is the partner or the partnership the entity with gain to invest in an Opportunity Fund? How is Opportunity Fund debt treated? If an Opportunity Fund taxed as a partnership sells an asset prior to the 10-year mark, is the gain considered income to the investor and taxable? The answers to these questions will have wide-ranging effect on taxpayers, and some of the questions look like they may be challenging for the Treasury to answer. Definitely an area to keep an eye on when the draft Treasury regulations are issued.
Consider printing and reading the letters. Although tedious, they are highly informative.